Title: Causes of financial distress of Portuguese municipalities: empirical evidence

Authors: Flora Cunha Lobo; Pedro Ramos; Oscar Lourenco

Addresses: Instituto Superior de Contabilidade e Administracao and GOVCOPP (Unidade de Investigacao em Governanca, Competitividade e Políticas Publicas), Universidade de Aveiro, R. Associacao Humanitaria dos Bombeiros de Aveiro, Apartado 58, 3811-902 Aveiro, Portugal. ' Faculdade de Economia, Universidade de Coimbra, Av. Dias da Silva, 165, 3004-512 Coimbra, Portugal. ' Faculdade de Economia e CEISUC (Centro de Estudos e Investigacao em Saude da Universidade de Coimbra), Universidade de Coimbra, Av. Dias da Silva, 165, 3004-512 Coimbra, Portugal

Abstract: This paper analyses the factors behind the financial distress of local government in Portugal. A Probit model is used to estimate the probability of a municipality entering into a financial recovery contract, regulated by the Portuguese Local Finance Law. Empirical results indicate that both structural and non-structural factors influence local financial distress. In addition to financial management practices, financial distress is also conditioned by political variables and socio-economic factors. Municipalities ruled by mayors that belong to a right-wing party are more prone to financial distress, and some municipalities are more financially vulnerable than others because of structural circumstances.

Keywords: municipal financial distress; local indebtedness; fiscal discipline; probit models; Portugal; municipalities; local government; financial recovery; financial crisis.

DOI: 10.1504/IJMEF.2011.043402

International Journal of Monetary Economics and Finance, 2011 Vol.4 No.4, pp.390 - 409

Published online: 27 Oct 2011 *

Full-text access for editors Access for subscribers Purchase this article Comment on this article